Bank failures still at record levels; deflation not an issue

April 18th, 2010

Friday, the FDIC closed eight banks, three in Florida, two in California, and one in each of three other states: Michigan, Massachusetts and Washington. So far this year, the FDIC has closed fifty banks, which puts it on pace to match last year’s 140 closures.

To put this in perspective, in 2008 there were only 25 closures and in 2007 a mere three. There were no bank failures in 2005 and 2006. The surging number of bank failures is another indicator of the severity of the Great Recession.

According to the December 31, 2009 FDIC Quarterly Banking Profile, the FDIC had 702 “problem banks” on its list, nearly three times the 252 at the end of 2008. So, 2010 may see more bank failures than 2009.

With the number of bank failures at such high levels, the FDIC losses are huge. 2007 to date, bank failures have cost the FDIC nearly $60 billion. The 2008 Washington Mutual collapse officially was, at the time, declared the largest in recent history. Now, though, there are reports that the WaMu failure was a “zero cost” to taxpayers. (Sounds like JPMorgan Chase picked up a lot of branches really cheap. Maybe it really does help to have your headquarters in NYC instead of Henderson, NV and Park City, UT.)

However, the US largest bank failure in history is not on the FDIC’s failure list. That inglorious record is held by Wachovia Bank, which was rolled into Wells Fargo, with the government guaranteeing Wells Fargo against certain losses. With more than $812 in assets, Wachovia came under the “too big to fail” umbrella.

Where’s the deflation?

The 1930s, before the FDIC, saw massive bank failures, somewhere around 9,000. As the banks failed, depositors lost their savings and the nation’s money supply shrank. In short, money disappeared and deflation set in, resulting in falling prices. Deflation is a decrease in the money supply. It is the reduced money supply that results in lower prices.

Today, we have failing banks, but the money supply is not shrinking. That’s because the FDIC and the Fed’s bailout programs, TARP (Troubled Asset Relief Program) being the big one. Who knows what tacit deals have been made.

The threat of deflation guarantees inflation. We have a Fed Head who, supposedly, is an expert on the Great Depression. He has said that all is necessary to prevent another Great Depression is for the Fed to print enough money. Inflation is the problem, not deflation, regardless of how many banks fail. Invest accordingly.

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